The oligopolistic market of Vitamin D3 (Cholecalciferol) API (active pharmaceutical ingredient) has come into focus due to China’s dominance and the recent global supply chain disruption due to the coronavirus epidemic. However, unlike other streams in the pharma industry, the supply of Vitamin D3 is unaffected in India. Fermenta Biotech (Market cap: Rs 620 crore, Share price: Rs 210), the sole producer of Vitamin D3 API in India, almost fully caters to the domestic industry’s needs of vitamin D3 applications in pharma, dietary supplements, food and animal feed.

Further, the company’s periodic capacity expansion and vertical integration plans are likely to serve it well.

Significant market share in the International Market

The organization receives around 80 percent of its income from the universal market. Comprehensively, it has a significant market share of the overall industry of around 25 percent in the Vitamin D3 API segment for people. In the animal feed industry for Vitamin D3, its piece of the pie in volume terms is around 6-7%.

Globally, the organization rivals MNCs like DSM. Further, Chinese makers, for example, Zhejiang Garden Biochemical High-tech, Taizhou Hisound Pharmaceutical, Kingdomway, and NHU are likewise key rival competitors.

Strategic Business Model – Backward Integration

In the last quarter, Fermenta Biotech finished its backward integration project (Rs 60 crore capital expense) to deliver cholesterol from wool grease. At present, preliminary runs are on post adjustment time of 3-6 months the organization ought to receive rewards from this venture. We accept this is a noteworthy milestone as it generously diminishes its sourcing hazard. Else, it had been reliant on the Netherlands and Japan for its crude material necessities. The organization doles out a recompense time of 3.5 to 4 years to this new venture.

Forward Integration Projects

The organization is putting resources into multi-amalgamation capacities which thus ought to encourage and facilitate product extensions and new products. This incorporates Vitamin D2, Vitamin D3 (from plant source) and nourishment added substances/premixes. A fascinating item to track would be the business amalgamation of Vitamin D3 from Phytosterol which is a plant-based source. The organization has petitioned for a patent right now the application has been distributed, asking for some complexities.

In the Financial year 2021, the organization intends to convey about Rs 30 crore for the new multi-combination office in Dahej, of which Rs 24 crore would be raised through debt. In any case, the pinnacle obligation/value proportion isn’t relied upon to go past 0.75x during the continuous Capex cycle. Further, the organization has benefited the ECB (External Commercial Borrowing)/FCTL (Foreign Currency Term Loan) course to support the pharma ventures which means 3-4 percent financing cost. Premium liabilities are not supported for hedged for currency volatility as it very well may be paid through export revenues.

Key Major Threats and Challenges

While the greater part of the volume opportunity in the Vitamin D3 industry originates from the animal feed-grade market, huge volatility currently is a litmus test. Over the most recent couple of years, organizations have revealed operating margins in the scope of 20-60 percent. This is regularly represented by the supply-request circumstance. Steps taken by China on the environment-related have influenced the supply side of the Vitamin D3 market – especially the animal feed market. This had prompted a sharp value to ascend right now. Nonetheless, lately, an episode of the African swine fever in a few Asian nations has influenced utilization and prompted a decrease of Vitamin D3 animal feed costs.
Its ongoing presentation has not been extremely reassuring, subsequently. It deals de-developed in Q3 FY20 because of the above marvels in Vitamin D3 animal feed costs, just as lower offtake by one of the biggest Vitamin D3 clients because of specialized issues looked in their plant. Edges were especially influenced by difficulties in the animal feed end-market.

Real estate business

Its real estate land portfolio is arranged at Worli, Pune, and Thane. Their worth is evaluated at over Rs 500 crore which makes around 60 percent of the organization’s enterprise net value. This brings generous valuation comfort for the nutrients business, should the organization adapt these advantages sooner or later in time.



Nonetheless, in the close to term, the organization needs to watch if the working benefit got from the portion is at any rate ready to support the land fund cost. Our computations recommend that, at present, the organization’s annualized segmental working benefit for FY20 is a smidgen shy of this. Be that as it may, the administration is confident of running the genuine resource working resources on a feasible premise within a reasonable time-frame, with no antagonistic effect on the core vitamins business operations and management.

Future Outlook and Growth Avenues

Fermenta Biotech is one of only a handful barely any Vitamin D3 API makers outside China, which has gotten noteworthy in the current global crisis where nations are thinking about whether they can diminish the danger of China being the principal or sole sourcing base. Simply from a hazard alleviation point of view, considerably record demands of API/ingredients from India are foreseen in times to come.

The organization is taking a gander at gaining by this move by concentrating on product extensions and capacity expansion. Another item dispatch in the animal feed grade section through its German agreement office would be a key factor to watch. At the vital level, the organization’s arrangement in the nutraceuticals segment is promising, given the endeavors towards vertical integrations and huge investments behind new unique products

Key hazard elements to watch would be unfavorable interest supply circumstance for the creature feed grade items, longer than foreseen adjustment period for the retrogressive incorporation venture and the working capital serious nature of the business. The organization’s exchange receivables are of the request 20 percent of the pharma income.

The stock is currently trading at EV/EBITDA (FY21 estimated) of 10.4x. This is much ahead of a few of its strategic competitors in the Active Pharmaceutical Ingredients industry. However, what is the biggest advantage and key difference for the company is its limited sourcing risk and the fact that its current implied market valuation uniquely dominates the value of its real estate business too. Adjusting for that, its current price offers valuation comfort, in our last key takeaway and advice.